February 28, 2011

Kandi Technologies (KNDI) Revisited

Company Delivers Electrifying Performance But Stock Gets Shocked.

Arthur Porcari

What’s that old Wall Street
saying. “No Good Deed Goes
Unpunished”? Well, management and shareholders of US listed,
China based, always profitable uncontested leader in Electric Vehicle
(EV) manufacturing and “Quick Battery Exchange” (QBE) development,
Kandi
Technologies (NASDAQ-KNDI), know the feeling well. As of now,
five months after I published my
first article on KNDI, the stock,
which subsequently more than doubled on incredible volume, has now made
a full round trip and is back to where it started. This in spite of
significant business advances and a total absence of negative news.
Even more incredulous is the 20+% drop last week at a time when oil
prices surged above $100bbl,
PRC raised gas prices to a record of over $4.30 a gallon, and
Beijing had the following revelation:

Beijing's air quality early this week was worse than "hazardous," the
lowest rating on an index used by the U.S. Embassy in the Chinese
capital to measure conditions, and was classified as "Beyond Index."
Heavy fog and the addition of almost 900,000 automobiles to Beijing's
roads last year have contributed to the deteriorating air quality…”

If there every was a positive “Perfect Storm” brewing for a Company,
KNDI, now having begun sales in China of its line of three PRC approved
(two, full road speed and subsidies eligible) pure EV’s selling for
$6-10,000 before subsidy, should be in the “eye” of it.
Five months ago as a Wall Street unknown, KNDI stock was quietly
resting in the low 3’s. At that time I published a multi-part
article which was quickly picked up by EV Internet news services and
blogs around the world introducing KNDI. As you can see from the chart
below, the effect was immediate and significant to the stock price.

Let me again make my position clear as I have on past articles. Though
since my first writing, I have personally visited the company and
management in Jinhua China, I do not have, nor do I care to have any
access to information not available to anyone who takes the time to do
good due diligence. Aside from what I, along with four other
investors saw when we visited the Company last November, (which did not
include any restricted information), what I publish is made up of
public information in the form of past filings, press releases, active
use of Google’s on-line translation features scouring Chinese websites,
and of course my opinion.

Exceptional Company Execution

If you are new to KNDI, or need a refresher, I strongly suggest you
read my past Seeking Alpha articles on KNDI which can be accessed
through the links below. It now appears that my revenues and earnings
prognostication for 2010 year end stated in my September article will
apparently prove to be too high. This miss is primarily due to a few
months delay in State Grids’s (China’s dominant electric utility and
KNDI partner) completion of its Main Battery Charging Farm in
Jinhua. This in turn delayed initial sales to only the last five
weeks of the year. I think you will find that most other speculations I
made have not only come to pass, but in many cases were far exceeded.

This chart shows a chronology of events that have taken place since my
first article. I have created a corresponding letter on the chart for
each published event to the headlines below. Several of the headlines
are from Seeking Alpha articles I wrote giving my “take” on prior
events. These articles are annotated by the (SA) after the date. Articles
annotated (AES) first appeared
on AltEnergyStocks. My
point in listing these events is twofold; one to show there was no
negative event to cause the drop in the stock price and two to give the
reader quick reference to advances made.

Rapidly growing China with its 1.3 billion population may rank second
to the US in World Purchasing Power as seen from the table below, but
the following comparison of motor vehicles per capita shows a
disparity, which based on “Peak Oil” assumptions leaves little room to
even noticeably “close the gap” let alone allowing a catching up with
internal combustion (ICE) vehicles. With China’s massive coal and hydro
resources along with aggressive building of Nuclear Power Plants, there
is no reason they must rely on ICE’s.

The tables above compare as of 2008 China to the US in per capita motor
vehicle ownership (cars, trucks, buses and freight but not 2-wheelers),
China on top with 32.2 motor vehicles per thousand population as
compared
to the table on the bottom for the US with 819.8. On this
basis, stunningly, China
stands
in 2008 where the US stood in
1915. Considering China’s current population exceeds the US
by
four fold, it should clearly be evident, even ignoring the rest of the
rapidly growing emerging economies, that alternative energy vehicles
will soon be mandatory in China, (for that matter, every country
irrespective of the price of oil). Thankfully China understands and has
made it quite clear it intends to be the world leader in vehicle
electrification. A realistic situation made easier for the country
since it has totalitarian control over its infrastructure for
“refueling solutions”, plenty of cash for initial subsidies and an
emerging middle class that can grow into EV’s, rather then be coaxed
away from gas powered vehicles.

US Stock Trading Comparisons

As of this writing, there are really only three relatively pure EV US
traded stocks for US investors to speculate on this rapidly emerging
potential trillion dollar pure EV space. Listed on NASDAQ
is Tesla
Motors (TSLA) and (KNDI),
and ZAP which trades on the OCTBB
(ZAAP).

The table below shows a general comparison I put together of some key
numbers of the three companies. TSLA’s numbers came from filings, press
releases and a
JP Morgan research report; ZAAP’s from recent press
releases and SEC filings; and KNDI from press releases and SEC filings.
Estimates for ZAAP and KNDI were derived by me based on information
gleaned from press releases.

US based TSLA’s current market
cap puts it at around 23 times JPM
research 2014 estimate of $1.07 a share. Now this report was put out
late last Summer, about the same time BYD (BYDDF.PK)
was sure it would
sell at least a few thousand of its e6 EV’s between China and the US by
the end of 2010. As it turns out, KNDI’s sales of 20 KD5010’s on the
first day of sales in China surpassed the total number of BYD e6’s sold
through the end of October. And, though some $10,000 cheaper then
TSLA’s $50,000 after tax subsidy Model S, BYD has now skipped a year
and doesn’t plan on bringing the e6 to the US until 2012. Thus,
bringing it more then a year behind schedule.

Lets call a spade a spade. TSLA is trading at its lofty levels for two
main reasons. It’s charismatic CEO, Elon Musk, knows how to spin a
story and there are a whole lot of “Green” funds that were formed after
President Obama took office and promised a plethora of Green companies
would soon be blanketing the country. This hasn’t happened, so those
Funds have to put their money somewhere. Though in an excellent space,
my bet is that TSLA is going to give a big shock to a lot of wallets in
the not distant future. The fact that “money pit” TSLA has a
market cap twenty times always profitable KNDI is, IMO,
incredulous.

California based ZAP (ZAAP) is
probably a company that most don’t
realize is now a possible “contender” in the EV space, both in the US
and China. But for those who do, I suspect they don’t truly realize how
expensive this entry was. I can’t imagine how this stock can currently
be trading with diluted market cap of $385 million. And this is well
down from the over half billion market cap it had in early January
right after it completed and announced a multi-part macro private share
placement at around $.24 a share with a lot of $.25 warrants totaling
some 200 million shares. The placement was used to raise $30 million to
buy 51% of a Jonway Automobile a Chinese gas powered carmaker who had
supposed revenues last year of around $77 million.

OK, so back to KNDI. KNDI, like
all players in this new EV space
doesn’t have a heavy EV track record. But they have sold close to 4,000
mini-ev’s over the past couple of years. Know any other near pure play
company in the space that can make such a claim? As seen by his short
bio, KNDI’s CEO, while not high profile, does have an impressive
EV background in China. Take this excerpt:

“From October 2003 to April 2005, Mr. Hu was the Project Manager
(Chief Scientist) in WX Pure Electric Vehicle Development Important
Project of Electro-vehicle in State 863 Plan.”

Incorporated in “State 863 Plan” was the genesis of China’s current
push to be the world leader in EV technology. The “WX” in the above
quote is Wanxiang, China’s largest diversified EV Company, the same
Wanxiang that caused Ener1 (HEV) stock to jump 65% on 21 million shares
on Jan. 18th on an announcement of a joint venture between the
two. But enough on history, let’s look to the future.

A potential major win for KNDI

For those who have not been following KNDI, but clearly evident in
Company announcements going back to the January 2010, KNDI has been
leading a coalition of energy giants in China for a “Quick Battery
Exchange” (QBE) solution whereby the consumer pays only for the
car,
and effectively “rents” the expensive battery. The “rent”
is
effectively paid by a small surcharge each time the battery is
exchanged. This model was put into limited commercial operation by KNDI
through the Joint
Venture
with State Grid in Jinhua in late November,
2010 as an experimental alternative to just plugging the car into a
charging post and waiting several hours for recharging. KNDI was at the
forefront of this potential paradigm shift due to its ownership of
several patents as can be seen by this State
Grid
announcement on its
website.

In January of this year, through subtle
but
telling comments by PRC
owned State Grid, it now appears that QBE has been selected as a
major
“Standard” for re-electrification of China EV’s. To date KNDI has been
silent as to this potentially monumental Company event, in wait for a
more definitive announcement by the PRC. Currently it appears there are
two QBE models in operation. There is of course KNDI’s “side slide”
model as can be seen by this video clip that
was taken with a cell
phone on my trip to the Company in November, and the second “rear
load”, that can be seen in this video
clip. The significance to KNDI is
not that the Company expects their mode of QBE to be selected
exclusively; it is that the concept of QBE seems now to be a chosen
“standard” which in turn gives KNDI’s model already in operation with
State Grid a major advantage over future competitors.

Valuation

With its current $100 million market cap, the stock is currently
trading around replacement cost of just its land and buildings, plus
$25 million working capital excess which should soon be apparent with
the soon to be released 10k. The current market is giving no value for
its always profitable and growing legacy business, let alone value for
its China potential. Let’s look at that potential.

Non-China legacy business should reach $50 million in sales in 2011.
That should generate non-GAAP net of $.35-.40 a fully diluted share.
Each 5,000 cars they sell in China should add another $.30-35 per
share. Considering the cost to a consumer after subsidy will only be
around $3000, this should not be an unrealistic number and could just
as easily be a multiple with some government or fleet orders.

If and when they reach the 100,000 car per year level, which would
still make them a minuscule player in a 20 million car a year market,
per share earnings would be in the $8-9 a share level. Put whatever PE
you want on that type of growth.

Bottom Line

If the market has taught us anything over the last couple of years,
EVERY stock is a speculation, no matter how blue chip. Each investment
should be looked at from a risk/reward point of view. Based on its 9
year history (3.5 trading in the US) KNDI management has done an
exceptional job of growing the Company in spite of the stock
price. The current “disconnect” between the current business and
China potential has, IMO, created an incredible upside with negligible
downside leaving me confident that KNDI will reward its shareholders
with a multi-billion dollar company irrespective of who the
shareholders are when that milestone occurs.

DISCLOSURE: Long KNDI

Arthur
Porcari
is
a
retired
former
regional stock brokerage firm President with 37
years stock market experience. His finance background includes, three
years a stockbroker, ten years a brokerage firm President, an OTC
Market Maker, twenty three years an Investment Banker to include 14
years as Managing Consultant to Corporate Strategies, Inc. a firm
specializing in advising young public companies and companies about
to go public on the “Ways of Wall Street”. He blogs
on Seeking Alpha under “Corstrat” and has been an
on-air guest as well has a guest host on Business Talk Radio
Network.
His passion and expertise is for small cap emerging growth
companies.

February 25, 2011

Will Distributed Solar Drive Utilities into Bankruptcy?

Tom Konrad CFA

Electric utilities today look a lot
like newspapers in 2000: Too much debt in an industry primed for
disruption.

Speaking at the Economist's Intelligent Infrastructure Conference, Brad Tirpak,
Managing Partner at the private investment fund Locke Partners made the
case that electric utilities are as woefully unprepared for the coming
disruption of cheap, distributed solar power as newspapers were
unprepared for the disruption of the Internet in 2000.

He outlined the following parallels:

Both had long been considered to be sure-fire businesses with
dependable income.

Both took advantage of the seemingly dependable income to load up
on debt.

Both face disruption from a disruptive technology (the Internet,
and distributed generation and efficiency) with the potential to
undermine their
businesses.

What Happened to the Newspapers

Newspapers have not gone away, but as readers and advertising
increasingly migrated to the Internet, circulation numbers
dropped. When a company is loaded with debt, a small drop in
revenues is magnified into a proportionately larger drop in
profits. To stay solvent, newspapers had to raise
prices.

Rising prices drove more readers away, starting the cycle all over
again, and eventually leading to bankruptcy for many of the
papers. As you can see from the chart below, many of those papers
that survived without bankruptcy lost most of their stock market
capitalization as more and more of their income was needed to service
their debt.

The Price of PV

Mr. Tirpak expects a similar story to play out in utilities. As
solar becomes cheaper and reaches grid parity, installations will grow
rapidly.

Edward
Fenster, CEO of SunRun
made the case that we don't even need further decreases in solar
photovoltaic (PV) panel prices to reach grid parity solar even without
the federal subsidies. According to Fenster, solar panels
currently cost $1.65 per watt, but total installed cost is about $5.50
per watt. While some of the extra cost is Balance
of
System (wiring, inverter, mounting), the majority is labor and
permitting. In Germany and Japan, permitting and installation are
only $1.50 per watt: Fenster believes we can get there too by doing
away with local permitting on standard installations ($0.50 per watt
reduction) and using greater scale and operating leverage ($1.50
per watt reduction.)

Those reductions would lead to an installed cost of $3.50 per
watt. According to my calculations, that would lead to a 30-year
internal rate of return of 4% (IRR) given a 20% capacity factor and a
$0.13 cost of electricity per kWh. If we assume any electricity
price inflation at all, the IRR increases with it, and a $3.50 per watt
PV installation looks attractive at any interest rate below the
IRR. We can also safely assume that there will be further
reductions in both panel prices and in other system component
prices.

What Might Happen to Utilities

PV will probably reach grid parity in the next few years, through a
combination of rising utility prices, increasing returns to scale in
installation, and cheaper balance of system costs. If this then
leads to rapidly growing PV installations, will it undermine utility
revenues, as the internet undermined revenues at newspapers?

I think the analogy is based on a misunderstanding of both the
scalability of distributed PV and the utility regulatory environment.

First consider the regulatory environment. Utility regulators are
charged both with ensuring that utility customers get service at a
reasonable cost, and also that utility investors will continue to be
willing to provide capital for necessary utility investments. If
the rapid spread of PV were to threaten utility solvency, regulators
would take action to help the utility maintain solvency.

Mr. Tirpak understood this, but made the assumption that the only
action regulators could take to protect utility solvency would be to
raise prices, which he assumed to mean the price per kWh of net energy
used. If this were correct, then we would indeed see the vicious
cycle of increasing rates and declining volumes that has undermined the
solvency of newspapers over the last decade.

It's not all about cents per kWh

Regulators have other options. First, they can allow the
utility to cut any PV subsidies intended to help the utility reach
solar energy targets. If a utility were threatened by too much
solar power, such subsidies would clearly be unnecessary to achieve the
statutory PV penetration. Subsidies are frequently cut in
response to unexpected growth in PV installations. In fact,
declining subsidies in response to installation growth are often
designed directly into these programs.

Electricity storage could be used to take a home entirely off the grid,
but such storage would be prohibitively expensive. If a home's
average usage and generation is 24 kWh/day (requiring a 5 kW PV
installation), then enough battery storage would be needed to get the
house through a few cloudy days when generation is greatly
reduced. Deep cycle lead-acid batteries typically cost $$200 per
kWh, so three days worth of storage would optimistically cost $14,400,
or $2.88 per kW of installed PV, making even $3.50/W PV
uneconomic.

Since PV does not enable users to do without utility service,
regulators can increase the fixed cost of utility service without
increasing the variable (per kWh) cost. This price rise will
improve utility profits without improving the economics of PV.
Other options would be to switch to time of use pricing for
electricity, with low prices being charged when there is excess
electricity (which would be when PV is operating, since we are assuming
a PV glut) and higher prices when there is not enough (dusk on hot
summer days.)

In a private email, Tirpak responded to this argument by saying he
could not "quantify the support for solar. People hate utilities
and love solar. Republicans and Democrats support it. At the end, the
[utility regulators] will listen to the public as well as
reliability." I certainly have met too many Republicans who hate
solar. As for utility regulators (and I've testified before
electricity regulators several times), I simply can't imagine them
intentionally adopting policies that would drive a utility into
bankruptcy.

I can't quantify the public support for solar, either, but I can put an
upper bound on it. Residential
solar leasing companies like SunRun now can provide solar
electricity to customers in seven states for
less than the cost of grid electricity, without any upfront cost.
They're doing good business, and driving rapid market growth, but most
homes in those states still don't have solar: SunRun uses innovative
strategies like partnering with One Block Off the Grid (1BOG) to assure sufficient
volume. If everyone truly loved solar, they could just hire a
call center in India to answer the deluge of telephone calls spend most
of their efforts installing panels.

Scalability

There are natural limits on how much PV can be installed by
customers. Many people's homes are shaded by trees or other
buildings. Other customers are renters, and so do not have the
option of installing PV. Industrial and commercial rooftops are
seldom big enough to produce enough power to meet relatively high
industrial and commercial electricity usage.

Utility scale installations could produce enough electricity, but such
installations need to sell their power directly to the utilities, at
much lower wholesale rates. It will be quite some time before
solar PV is able to compete at wholesale rates in the absence of
subsidies.

Other Disruptors

Tirpak also lists other potential disruptors of the utility model:
energy efficiency, smart
grid, LEDs, ground
source heat pumps, and cheaper hydrogen. He did not go into
detail on why he expects any of these to be significant, but my take is
that only cheap hydrogen has the potential to change the story I
outline above.

Smart grid, by its nature, is being implemented by utilities at
regulators' request: the smart grid will not allow us to do without the
grid, since it is the grid. Perhaps Tirpak instead meant microgrids,
which are enabled by smart grid technology. While microgrids have
the technical capability of cutting the cord to the larger utility,
they seldom have the legal authority. A microgrid supplying power
to a small group unconnected to the utility would legally be a utility
itself, and subject to utility regulators. For the reasons
outlined above, those regulators would not allow the formation of
microgrids to undermine the solvency of the utility.

Efficiency Technologies

The potential for LEDs to further reduce energy use is fairly
small. In 2008, I made a weirdly similar (and similarly
overblown) argument that utilities
might be undermined by the phase-out of the incandescent light bulb.
My argument was not that this would reduce electricity sales (which it
will), but that it will undermine utility energy-efficiency
programs. This will happen because the phase-out of traditional
incandescents would make the former stalwart of residential energy
efficiency programs, the compact fluorescent light bulb, (CFL) the new
baseline. Current LED bulbs use almost as much energy as CFLs of
the same brightness, although the technology has the potential to use
only 40% as much. But even assuming that LED technology reaches
this potential, where a CFL saved 75 watts replacing a 100 watt
incandescent, an LED only has the potential (at best) to save another
15 watts: One-fifth of the savings of the CFL when compared to an
incandescent. Current technology saves only 2-5 watts over the
CFL, at a cost of $40. If the now mature technology of CFLs did
not disrupt utilities, LEDs don't have a chance.

Ground-source (aka geothermal) heat pumps (GHP) are already a mature
technology, and so are unlikely to see rapidly falling prices like
solar. That said, they are already an enormously efficient way to
heat and cool a building, and their widespread adoption would do much
to reduce energy use. That is why I like GHP
stocks. However, GHPs are more likely to be a boon to
electric utilities than a burden. GHPs replace heating by
natural gas or fuel oil with electricity, adding to utility
sales. Just as important, the timing of electricity used by GHPs
has the effect of improving utility grid utilization. When
heating, GHPs run mostly in the winter
and at night, which is just when utilities often have low demand and
high generation from wind. When used for cooling, they reduce
summer peak loads by displacing less efficient air conditioners.

More broadly, energy efficiency technologies (which include LEDs and
GHPs) are unlikely to undermine utility revenues because of the significant
barriers to adoption. After all, energy efficiency is already
much cheaper than grid based electricity, costing only a few cents per
kWh saved. With grid electricity costing five times as much as
efficiency already, it seems unlikely that a price shift that makes it
cost even ten times as much will make a radical difference in the rate
of adoption of efficiency technology.

Hydrogen

Of the technologies Tirpak listed, only cheaper hydrogen has a chance
of disrupting the electric utility model the way the Internet disrupted
newspapers. Hydrogen might disrupt utilities by providing a cheap
way to store electricity, which in turn would allow individuals to go
off the grid. Yet while hydrogen has the theoretical potential to
provide relatively inexpensive energy storage, cheap and efficient
electricity storage with hydrogen has not yet even been demonstrated in
the lab, at least to my knowledge. That puts any such technology
at least a couple decades away from commercialization. I'm not
holding my breath.

Conclusion

Given that utility customers are captive in a way that newspaper
customers never were, it seems unlikely to me that utility stocks in
the
coming decade will follow the performance of newspaper stocks in the
last decade. Lower
prices for and increasing penetration of PV will change the way we pay
for utility service, but not free us from utilities all together.
Only the advent of extremely cheap electricity storage would allow us
to truly cut the umbilical power line, and until we can cut that line,
regulators will find a way to charge us enough to keep utilities
solvent.

While regulated utilities should weather the coming solar storm,
independent power producers (IPPs) which sell their power into the spot
market, or whose power purchase agreements (PPAs) expire at the wrong
time, might be threatened. This is especially true for IPPs with
inflexible generation that cannot easily ramp up and down to compensate
for fluctuating electricity supply from renewable sources.

If you're convinced that PV is on the cusp of grid parity and rapidly
expanding deployment, don't short regulated utilities, as Mr. Tirpak
suggested. Instead, look at IPPs with mostly coal-based
generation fleets and PPAs expiring in five years or so.

DISCLOSURE: None.

DISCLAIMER: The information and trades
provided here are for informational purposes only and are not a
solicitation to
buy or sell any of these securities. Investing involves substantial
risk and you
should evaluate your own risk levels before you make any investment.
Past
results are not an indication of future performance. Please take the
time to
read the full disclaimer here.

February 23, 2011

Just One Sector – Fuel Efficiency Pure Plays

John Petersen

In 1789 Benjamin Franklin wrote "in
this
world
nothing is certain but death and taxes." Today he
probably would have written "in this world nothing is certain but
death, taxes and rising oil prices." There's no escaping the misery,
but astute investors who take the time to understand the fundamental
trends can profit as the misery unfolds. For the short term, I'm
convinced the biggest opportunities will be in fuel
efficiency technologies for cars and light trucks.

After 20 years of complacent stagnation, the US started to get serious
about light-duty vehicle fuel efficiency in 2005 and has made solid
progress with improvements in the 14% to 18% range. The rate of change
will ramp rapidly over the next five years as aggressive new CAFE
standards that were adopted in April 2010 take effect. The following
graph provides an at a glance summary of new light-duty vehicle fuel
efficiency over the last 30 years and new fuel efficiency standards for
the next five years.

The usual
diversified group of first tier manufacturers of automobiles and
component systems will control two of the three technologies. Only one,
stop-start idle elimination, offers a pure-play
opportunity with a certain outcome.

Stop-start is the most sensible fuel efficiency technology you can
imagine – turn off the engine while the car is stopped in traffic.
While the
concept is simple, implementation is a beast because drivers
typically want their sound systems, climate control, lights and other
accessories
to keep working when the engine is off. Therefore, the key enabling
technology for start-stop systems is a better starter battery.

Traditionally, a battery had to start a car once during a normal trip.
With a stop-start system, however, the battery has to start the engine
an average of once per mile and carry critical accessory loads while
the engine is off. For a one-minute engine-off cycle, the accessories
will demand ten times as much energy as the starter. For a 15-mile
commute with one engine-off cycle per mile, the battery will have to
deliver 165
times
the
energy that it would in a car without stop-start. The
battery load is immense, but an optimized stop-start system can slash
fuel consumption in city driving by up to 15% and do it for an
incremental capital investment in the $400 to $800 range.

The normal flooded lead-acid batteries we've used for decades simply
can't stand up to the demands of stop-start systems. That reality has
forced automakers to rely on cut-out systems that disable the
stop-start function when the battery's state of charge falls below a
minimum level, and won't re-enable the stop-start function until the
battery recovers an acceptable state of charge. The result is
stop-start systems that don't function anywhere near peak efficiency.
To minimize problems, automakers are currently using dual battery
systems and upgrading to absorbed glass mat, or AGM, batteries.

In recognition of the shortcomings of flooded batteries, the leading
battery manufacturers are building new AGM battery production capacity
at a blistering pace. In 2007, Johnson Controls (JCI),
the world's
biggest battery manufacturer, had global production capacity for
400,000 AGM batteries per year. Their announced expansion projects will
boost that capacity to 11.2 million AGM batteries per year by 2014 and
further expansions in the US are being discussed. Exide Technologies
(XIDE)
is also on an expansion spree that will boost its AGM battery
capacity from 500,000 units in 2009 to 3.5 million units in 2013. On a
worldwide basis, Lux Research forecasts that AGM battery demand will
soar by 800% over the next five years, from three million units in 2010
to 27 million units in 2015. As they substitute higher margin AGM
batteries for lower margin flooded batteries, the revenues and margins
of leading battery manufacturers including JCI, Exide and to a lesser
extent Enersys (ENS)
will soar. Their stock prices will follow suit.

While AGM batteries are currently the best available technology for
stop-start systems, they are far from ideal because their ability to
recover an optimal state of charge deteriorates rapidly as the battery
ages. Using simulation protocols from BMW and Ford, researchers have
learned that the time required for an AGM battery to recover from an
engine-off event increases from 50 to 60 seconds with a new battery to
4 or 5 minutes with a battery that's been in service for six months.
The bottom line is automakers need a better solution than AGM
batteries. Until a better solution comes along, however, the AGM
battery will reign supreme as the battery of choice for the stop-start
market.

The two principal contenders for "better solution" honors are:

A multi-component system from Continental AG and Maxwell
Technologies (MXWL)
that combines an AGM battery, a
small
supercapacitor
module and associated control electronics in a
system that eliminates the voltage drops and black screens that
commonly occur when the
starter engages at the end of an engine-off cycle; and

The third generation lead-carbon battery from Axion Power
International (AXPW.OB)
that replaces the lead-based negative electrode
in a conventional AGM battery with a carbon electrode assembly that
boosts cycle life by 400% and provides consistent charge recovery times
of about 35 seconds through four years of simulated use.

The Maxwell - Continental system is available now and was recently
selected by
PSA Peugeot Citroën for use in Citroën C4 and C5 diesels
featuring
PSA's e-HDi second generation micro hybrid system. With an estimated
three-year value in the $50 million range, this design win should
provide a significant boost for Maxwell's top-line revenue. Despite its
advantages, however, the Maxwell - Continental system is not an ideal
solution because the supercapacitor can slow but it can't stop the
deterioration of the AGM battery it's paired with. So over time,
vehicles equipped with the Maxwell-Continental system will suffer the
same kind of performance degradation that all other stop-start systems
exhibit.

The most promising solution to the challenges of stop-start, the
PbC® battery from Axion, is in the final development stages and
won't be ready for a large-scale commercial rollout until 2012. Axion is currently
installing a second-generation fabrication line for their serially
patented carbon electrode assemblies and potential customers should
begin validation testing on the new fabrication processes and equipment
soon. Once its potential customers validate the fabrication process,
the last major step will be to build additional electrode fabrication
capacity so that Axion can manufacture PbC batteries on its own AGM
battery line and sell electrode assemblies to other AGM manufacturers.
Since the PbC electrodes are designed to work as plug-and-play
replacements for traditional lead-based electrodes, Axion should be
uniquely positioned to leverage existing AGM battery manufacturing
capacity while giving other battery manufacturers the opportunity to
sell a premium product to their existing customers.

While the PbC battery is still a development stage technology and Axion
is just barely out of the nano-cap range with a $60 million market
capitalization, its roster of disclosed industry relationships is
extraordinary. Axion has longstanding relationships with both East Penn
Manufacturing and Exide, the second and third largest AGM battery
manufacturers in North America; it has a service contract to develop a
battery management system for Norfolk Southern (NS) which wants to
retrofit a portion of its 3,500 unit locomotive fleet with hybrid
drive; and the PbC battery has demonstrated
exceptional performance
during 18 months of testing by
BMW, the industry leader in stop-start with over a million EfficientDynamics vehicles on
the road today. In over 30 years as a small company securities lawyer,
I've never seen another company that was able to generate a
comparable level of interest and involvement from the giants in its
industry.

The energy storage sector offers a wide range of fuel efficiency pure
plays. The following table provides summary
data on key financial (in millions) and market metrics that I consider
important. While JCI is not technically an energy storage pure play
because of its
diversified
operations in auto parts and building efficiency, I've included it in
this list because 14.6% of its revenues and 52.5% its earnings are
derived from battery manufacturing operations.

While I closely follow the energy storage and vehicle electrification
sectors and am convinced that every manufacturer who can bring a
cost-effective product to market will have more demand than it can
handle, these five companies have the clearest paths to market beating
growth over the next five years and are my favorites for that reason.
JCI, Enersys, Exide and Maxwell have been stellar performers since
December 31, 2008 with market crushing gains of 126% to 264%. Axion has
been the laggard of the group, losing 39% of its market value it raised
new capital in a brutal market and worked to complete the development
of its promising PbC technology and start climbing out of the valley of
death. For the next few years, I expect the entire group to outperform
the market by a wide margin because the die is already cast.

Fuel efficiency has been a hot topic in the automotive world for the
last five years and new regulations in the US and EU will provide a
massive impetus for immediate change. Increasing political turmoil in
oil producing regions can only add to the sense of urgency. There is a
wide variety of potential long-term solutions, but short-term solutions
to immediate problems are very limited. For the next five years,
stop-start will be at or near the top of the list.

Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and holds a substantial long position in its common stock.

February 21, 2011

Finding the Key to CIGS PV Reliability

by Joseph McCabe, PE

This past week there was a photovoltaic
(PV) workshop that probably wasn't on your radar. It was held at the
National Renewable Energy Laboratory (NREL) and is called the PV
Module Reliability Workshop (PVMRW). This is where the nerds of the
PV industry get together to discuss the factors that influence how
long a PV module will last and other factors which might influence
the long-term performance of a PV system. It wasn't on your radar
because it is not something that influences big business. Or is it?

If you track the PV industry it is more
likely that you heard about the February 16th Photon CIS conference
in San Francisco where high level people were discussing their
company capacities and expected CIS efficiencies. But at the PVMRW
meeting, held at the same time, people were discussing the challenges
with copper indium gallium and (di)selenide PV (CIGS), which is very
similar to CIS. CIGS has the promise of low cost manufacturing with
high efficiencies. However many companies are taking quite a long
time to develop large markets. CIGS products deposited on glass, like
Solar Frontiers (100% subsidiary of Showa Shell [Tokyo:5002]), have
had many years of advancements leading to the February 15th
announcement indicating commercial production at their newest plant
located in Kunitomi Japan.

The Promise of CIGS

CIGS holds the promise of low cost
production and of being packaged in a flexible module. This month’s
Department of Energy (DOE) SunShot
Initiative announcement hopes to reduce PV
systems costs by about 75 percent to roughly $1 per watt; flexible
CIGS PV modules can provide a large system level price reduction
towards this DOE goal. NREL specifically indicated the system level
cost reductions could be from $0.17 to $0.94 per watt savings using
flexible PV modules instead of traditional rigid glass.

The Hunt for the Culprit

The high efficiency, flexible PV module
has been hampered by apparent susceptibility to moisture of the CIGS
technology. Potential culprits range from the packaging of the
modules that allow for moisture to enter into the PV cells to
transparent conductive oxides (TCO). TCO are one of the layers in the
CIGS thin film PV module.

At PVMRW companies like Dow Corning,
DuPont, Saint-Gobain, Mitsubishi Plastics, and 3M were presenting how
their materials can protect the PV product, specifically CIGS
susceptibility to moisture. If the culprit causing the
susceptibility to moisture inherent in today's CIGS technologies is
the TCO, as NREL suggests, these expensive and unproven packaging
solutions might not be needed.

Various CIGS companies provided
reliability perspectives at the PVMRW. SoloPower, which just
announced a conditional commitment for a $197M loan guarantee from
the DOE for a new facility in Oregon, presented the effects of light
soaking on shunts in their CIGS. Solarion compared reliability of
their CIGS in a glass-glass encapsulation to a flexible
encapsulation. Ascent
Solar
(ASTI) presented highly accelerated weathering
of CIGS and Nanosolar presented their design for reliability on
keeping the water out of CIGS. Companies like ADCO adhesives were
supplying reliability information on edge seals and other building
integrated PV (BIPV) adhesive attachment solutions appropriate for
flexible CIGS.

One company's presentation was quite
revealing. Sunpower
(SPWRA) had quantified and presented various
system failures to help understand reliability from their extensive
historical field experience. SunPower's acquisition of PowerLight
enabled them to compare various manufactures’ products over a
number of years of performance data. This sharing of system failure
data is indicative of the spirit of this unique PVMRW meeting. Our
industry is learning from each others failures so that the industry
as a whole will prosper. Just a note, SunPower’s modules were not
necessarily those included in the system failures, but other
manufactures modules.

Reliability is Location-Specific

For the first time I was hearing
multiple discussions for location specific reliability evaluations.
All modules are currently required to pass a set of tests that help
build confidence in the safety and potential performance of the PV
over time. However, there is not necessarily a correlation of those
tests and the actual longevity of the PV product. It has only been
assumed that these tests can represent a high probability of
long-term performance. The tests reflect a general understanding of
failure mechanisms for a relatively hot-humid location. New location
specific reliability testing can open up hot dry markets for specific
PV technologies, and can help to guarantee performance of PV products
that might perform better in cold or humid climates. NREL’s Rommel
Noufi
suggested looking at today’s highways for what our PV industry
might look like in the future. What he meant is that the highways are
full of various manufactures and models of transportation solutions,
and similarly, there will be many PV solutions for various locations
and purposes in the future.

There were three tracks at the PVMRW;
crystalline silicon, concentrating PV and thin film. CIGS discussions
dominated the thin film track possibly due to the high interest in
long term performance opportunities. Kudos has to go to NREL and the
DOE for supporting this annual PVMRW workshop. And thanks should go
out to the nerds of the industry who have worked for many years to
build the current state of reliability in the PV industry. Over the
past few decades it is these groups of people that have enabled PV
systems to build the confidence in the PV market place that enables
more than 20 years of reliable system performance.

DISCLOSURE:
No
positions.

Joseph
McCabe
is a solar industry nerd with over 20 years in the business.
He is an American Solar Energy Society Fellow, a Professional
Engineer, and is internationally recognized as an expert in thin film
PV, BIPV and Photovoltaic/Thermal solar industry activities. Joe is a
Contributing Editor to altenergystocks and can be reached at energy
[no space] ideas at gmail dotcom.

Those that converted to corporations are still out there, and still
paying good dividends. And while a few are gone because of
mergers, there are also a few new ones that I did not mention in my
2007 article. They are a great place to start for investors who
want a green portfolio, but need income or can't handle the
stomach-turning gyrations of the solar or wind stocks.

I've listed the funds I know of in the table below, along with their
current dividends and the sectors they invest in.

As you can see, although these companies have become corporations, the
yields will appeal to income investors.

DISCLOSURE: Long AQUNF, NPIFF.

DISCLAIMER: The information and
trades provided here and in the comments are for informational purposes
only and are not a solicitation to buy or sell any of these securities.
Investing involves substantial risk and you should evaluate your own
risk levels before you make any investment. Past results are not an
indication of future performance. Please take the time to read the full disclaimer
here.

February 18, 2011

Where are Solar Stocks Headed in 2011?

A new series that offers a quick
snapshot of the most recent solar stock performance. This week, the
current market signals: Investor Caution.

Talk about the Million Dollar Question. Wouldn't we all like to know
the answer to 'Where is the Market Headed in 2011?' Unfortunately, as
we all know – no one knows the answer to this question.

But we can look at history and find some fairly interesting data (from the Stock Traders
Almanac). While it's not perfect, it certainly has a far
above-average accuracy.

The Dow Industrial Average [DJIA] managed its best month of January
since 1997 with a return of 2.7%, while the S&P 500 [SPX] fared
nearly as well with gains of 2.3%.

There is an old stock market saying, first coined by legendary market
historian Yale Hirsch, "As January goes, so goes the year,"

The average return, based upon data since 1970, for the rest of the
year after an up January is 12.2%
for the S&P 500. Following down January returns the S&P 500 has
averaged 11-mo returns of -2.1% until the end of the year.

Does this mean that the market will be up over 12% for 2011? There is
no way to know.

But it is certainly interesting to look back at history and see that a
positive January certainly bodes well for a positive stock market for
2011 as a whole.

On the other hand, currently the market is very overbought and will
likely have at least a 10% correction along the way.

Take a look below for an overall summary and table that offers a
current snapshot of the "technical picture" of my selected solar
stocks. I plan to update this series weekly and/or whenever there are
any significant changes.

Summary

Note: At this time there is a
general market comment advising caution to perspective buyers.

A number of the stocks I follow have seen their monthly momentum turn
negative in the last week or two. The sector finally seemed to be
showing signs of life again after a terrible 2010, but in the past few
weeks a number of our stocks dropped below their 50 day MA - a short
term negative for the stock.

JASO
- starting to show some strength. If stock closes below $7.00 it is a
further sign of weakness, if the stock closes above $8.25 it is a sign
that the stock has regained its upside strength.

SOLF
- SOLF is at a critical long term support level. A close below $8.00 it
would trigger a sell signal.

Other Stock Comments

SPWRA
- starting to show some real strength for the first time in quite a
while. Looks like the next candidate to move up to a "S" strong rating.

Market Comment - Caution Advised

Currently the market has two potentially serious "red flags" warning
investors to be cautious:

Investor Sentiment

Investor
sentiment is considered to be a contrary indicator and when too many
investors or investment newsletters are Bullish – it is a time to be
cautious.
At the current time BOTH the American
Association of Individual Investors (AAII) poll of its members and the
Investors Intelligence poll of investment newsletters are above their
danger zones of 50%.
There is no guarantee of anything in the
stock market, as we all know. But levels of sentiment so extremely
bullish would historically indicate at least the potential for a market
correction of 10% to 15%.

Stocks are very overextended

On the
technical side the market is very overbought above its 200 day moving
average. In fact, the current overbought condition is more extreme than
any important market top in the last 10 years – certainly another
significant reason to be very cautious at this juncture in the market.

50 Day Moving Average (MA) -
this is a short term measure of a stock's
current technical picture. If the current price is above the 50 day MA
it is a positive indication and if it is below the 50 Day MA it is a
negative indication.

Overall Trend - this is the
overall longer term trend of the stock
(Positive+ or Negative -). When solar stocks were badly underperforming
the market almost all our solar stocks were in negative trends - the
stocks that turn to a positive trend first are usually the strongest
stocks relative to the group as a whole.

Weekly Momentum (Mom.) and Number of
weeks positive or negative - this
is a measure of the short term momentum of a stock. It is derived by
comparing the one week moving average (MA) of the stock to the five
week moving average. When the one week MA goes ABOVE the 5 week MA the
weekly momentum turns positive, when it goes BELOW the 5 week MA the
weekly momentum turns negative. Momentum, on average, stays positive or
negative for between 6 and 8 weeks. So a stock that has been negative
for 1 or 2 weeks will usually have at least a few more weeks of
negative action to come. This would be useful, for example, if someone
wanted to buy a particular stock and its momentum just shifted to
negative, they will likely be able to buy the stock lower if they are
patient and wait for a pullback in the price of the stock.

Relative Strength - this is a
measure of the strength of an individual
stock relative to a widely followed index - in this case the Standard
and Poor's 500 (S&P 500). If the relative strength is “buy” this
means that the individual stock is stronger relative to the index and
vice versa.

Rating - this a my technical
rating on each of the solar stocks after
reviewing the technical indicators (momentum and trend) plus a number
of additional indicators (monthly momentum, strength relative to the
S&P 500 stock index, overbought/oversold status etc.) to arrive at
a comparative rating as to how each stock stands technically. N =
neutral, W = weak and S = strong.

Background Notes

Keep in mind that there are two basic types of equity (stock) analysis.
Below is a brief description of each and its primary purpose:

Fundamental Analysis - this is
the analysis of the fundamental
financial condition of the company and will identify which stocks are
stocks you may want to buy when the timing is right. This form of
analysis will give you NO indication of the best time to buy the stock.

Technical Analysis - this form
of analysis will tell you "when" to buy
a stock. It will do this by showing you (in chart format) the basic
interaction of supply and demand and when the two change and shift
which will indicate a time to buy or a time to sell.

Mr. Lynch has worked, for 34 years as
a Wall Street security analyst,
an independent security analyst and private investor in small emerging
technology companies. He has been actively involved in following
developments in the renewable energy sector since 1977 and is regarded
as an expert in this field. He was the contributing editor for 17 years
to the Photovoltaic Insider Report, an early publication in PV that was
directed at industrial subscribers, such as major energy companies,
utilities and governments around the world. He is currently a private
investor and has from time to time been a financial/technology
consultant to a number of companies. He can be reached via e-mail
at:SOLARJPL@aol.com. Please visit
his website for the promotion of
solar energy – www.sunseries.net.

This article was originally published
by InvestorIdeas.com
and was
reprinted with permission.

February 17, 2011

When Contrary Pays

It is a scenario that has plays out quarter after quarter. A
leading company in popular sector reports decent results, but surprises
investors with guidance below the prevailing consensus. Then the
stock price crashes as sell-side analysts cut estimates, price targets
and ratings. It is a situation that many investors fear as they
see once profitable stock positions lose value.

Not the contrarian investor! There are potential profits to be
made for the obstinate, but fearless investors willing to do their
homework.

This very situation is playing out in shares of Power One, Inc. (PWER:
Nasdaq), a leading supplier of power conversion and management
solutions for renewable energy systems, particularly the solar
industry. The company posted revenue and earnings results for the
fiscal fourth quarter ending January 2, 2011, above the prevailing
consensus estimate of $352.5 million in sales but a nickel below the
EPS estimate. Power One had consistently beat the consensus EPS
estimate in each of the last four quarters.

If those mixed results were not disquieting enough, investors appeared
unnerved by management’s guidance for the March 2011 quarter.
Unfortunately, Power One management guided for sales in a range of $260
million to $290 million, well below the prevailing view on Power One’s
prospects. According to Thomson-Reuters analysts had published
estimates for sales in a range of $281.6 million to $360.4 million in
sales and earnings per shares in a range of $0.28 to $35 for the March
2011 quarter. This produces a consensus estimate of $0.31 EPS on
$313 million in sales.

Shares of Power One sold off 21.2% in the first day of trading
following management’s bombshell. This may be a bit of an
overreaction given that guidance for the March 2011 quarter was in part
based on poor weather conditions impacting near-term customer order
patterns. Management did cite a reduction in feed-in-tariffs in
European markets and excess inventory in its distribution channels as
factors impacting demand in the long-term. Nonetheless, guidance
for sales in 2011 appears to support the prevailing consensus estimate
of $1.3 million in total sales for 2011.

Clearly things are not as rosy as analysts had projected.
However, that is not to suggest Power One is going out of
business. The company still appears to have a strong competitive
position in both its renewable energy solutions and power solutions
segments. Recent results are not yet available for most of its
competitors such as Lineage Power, Delta Electronics, or SMA Solar
Technology. Emerson
Electric Co. (EMR: NYSE) reported sales and earnings in-line
with expectations for the December 2010 quarter. Emerson
experienced growth and margin compression in its power segment similar
to Power One’s report.

The stock price pullback provides a compelling entry point for
investors with the patience to wait out the time it take for the dust
to settle on this single quarter report. The stock is now trading
at 9.6 times trailing earnings. Assuming analysts trim estimates
for 2011 by the same margin as they missed in the fourth quarter, we
expect the consensus estimate for 2011 to drop to $1.10 (from
$1.26). The implied forward price earnings multiple would then be
8.4 times - a compelling deal for the contrary investor.

Debra Fiakas is the Managing Director
of Crystal
Equity Research, an alternative research resource on small
capitalization companies in selected industries.

Neither the author of the Small Cap
Strategist web log, Crystal Equity Research nor its affiliates have a
beneficial interest in the companies mentioned herein. PWER is included
in Crystal Equity Research’s The
Mother’s
of Invention Index in the Efficiency Group.

February 16, 2011

Alternative Energy Technologies and the Origin of Specious

John Petersen

Thanks to a recent
comment from JLBR, I've
found a new hero in Dr.
Peter Z. Grossman, an economics professor from
Butler University who cogently argues that government attempts to force
alternative energy technologies into an R&D model that was created
for the Manhattan Project and refined for the Space Program will always
result in commercial disaster because "the goal of the Apollo Program
was the demonstration of engineering prowess while any alternative
energy technology must succeed in the marketplace." In a recent article
titled "The Apollo Fallacy and its Effect on U.S.
Energy Policy" Dr. Grossman summarized the problem as
follows:

"The Apollo fallacy has been
detrimental to the development of
effective energy policies in the US [and] instead of asking what kinds
of
programs might be useful, the government holds out the promise of a
technological panacea to be delivered simply by an act of Congress. The
prospect of an energy panacea actually has some political benefits. It
allows politicians to claim that they can provide simultaneously the
two outcomes most Americans seek from energy policy: low energy prices
and energy independence. In fact, with conventional resources these
goals are mutually exclusive. To get low prices, the government should
provide incentives to drill for oil and gas not just in the US but also
in places where they might be exploited more cheaply – of course making
the nation more dependent on outside sources. To lessen dependence
(true energy autarky is not a feasible goal) on foreign resources, the
only method government can use with conventional resources is to raise
prices through taxes. But a new technology presumably can to both at
once: provide cheap, US-made energy. Unfortunately, the history of
energy
programs argues that the pursuit of a technological-commercial panacea
will fail."

In a 2008
white paper titled "The History
of U.S. Alternative Energy Development Programs: A Study of Government
Failure," Dr. Grossman started with the Eisenhower
Administration's wildly optimistic plans to commercialize nuclear
fission reactors for civilian electricity and offered a brief history
of serial energy policy failures including:

The Nixon and Ford Administrations' support for synthetic fuels
from coal and oil shale;

The Carter Administration's support for synthetic fuels, nuclear
fusion and ethanol; and

The Clinton Administration's "Partnership for a New Generation of
Vehicles" that failed miserably while privately funded initiatives from
Toyota and Honda were remarkably successful.

My additions to Dr. Grossman's list would include Bush the Younger's
support for fuel cells, the hydrogen economy and corn ethanol, and the
Obama Administration's support for vehicle electrification and
alternative energy in general.

These ambitious energy policies all shared three fatal flaws:

An inability to distinguish between the technologically possible
and the
economically desirable;

A belief that intervention can force innovation and overcome
technical challenges on time and within budget; and

A failure to recognize that generous subsidies invariably lead to
increased demand for more generous subsidies.

The end result has always been grandiose, unrealistic and extravagant
mandates that resulted in catastrophic losses for naive and credulous
investors who bought the hopium.

For over sixty years, the government has consistently and predictably failed to understand
that industrial revolutions arise from technologies that are perfected
by entrepreneurs and prove their value in a free market. The government
can accelerate advances in basic science and engineering when cost is not an object, but it can't make
technologies cost-effective or ignore the realities of a
resource-constrained world. The following cartoon from Jan Darasz appears in the most
recent issue of Batteries
International Magazine and may overstate the problem a bit, but
only a tiny bit.

During the "Sputnik moment" discourse in his recent State
of the Union Address, President Obama promised to
spend billions of taxpayer dollars to put a million plug-in vehicles on
the road by 2015. Back in the business world, Johnson Controls (JCI)
and
Exide Technologies (XIDE)
are spending their own money, together with a $34 million ARRA battery
manufacturing grant, to build
factories that will make AGM batteries for 14.7 million micro-hybrids a
year by 2014. The President's plan will save up to 400 million
gallons of gas per year by 2015. The 56
million micro-hybrids that will be built during the same time frame
using AGM batteries from JCI and Exide will save 1.6 billion gallons of
gas per year. Last time I checked,
spending millions to save billions of gallons of gasoline was more
sensible than the inverse.

I've frequently argued "Alternative
Energy
Storage Needs to Take Baby Steps Before it Can Run." A favorite
quote from William Martin's novel "The Lost
Constitution" says it all – "In America we get up in the morning, we go
to work
and we solve our problems." Unfortunately government programs never use
the tools that are readily available to do the work. Instead they
impede sensible actions like using compressed natural gas instead of
gasoline and let urgent problems fester while new, exotic and
politically popular technologies are invented and refined, but never
commercialized. A cynic might suggest that it's a great way for a
politician to kick the can down the road while deferring blowback from
policy failures and unintended consequences until his successor takes
the oath of office.

We have 60 years of experience that proves well intentioned but
ill-conceived government alternative energy technology initiatives
aren't doing the job. Investing $46 of capital to save a gallon of
gasoline with a plug-in vehicle is foolish when you can save that same
gallon of gasoline with a $24 capital investment in an HEV. Taxing
Peter to underwrite the cost of Paul's new car will
impoverish the masses instead of empowering them. Using imported metals
to make non-recyclable batteries for the purpose of conserving more
plentiful
petroleum has all the intellectual integrity and economic
appeal of using cocaine as a weight loss supplement.

There are solid growth opportunities in the domestic energy storage
sector. JCI and Enersys (ENS)
both trade at about eighteen times earnings while Exide trades at about
twelve
times earnings. In the more speculative small company space, Axion
Power
International (AXPW.OB),
ZBB Energy (ZBB)
and Beacon Power (BCON)
all
present intriguing value propositions as they emerge from the trough of
disillusionment and begin to build industry relationships and revenue
by proving the value of their products one baby step at a time.

I'm convinced that every manufacturer of energy storage devices that
brings a cost-effective product to market will have more business than
it can handle as dwindling global energy supplies make
storage more cost-effective than waste. That conviction, however, does
not extend to market darlings like Tesla Motors (TSLA),
A123 Systems
(AONE)
and Ener1 (HEV)
who owe their high profiles and huge swaths of their balance sheets
to government largess and glittering promises of an all-electric future
once they
prove that their wonder products work in the hands of normal consumers
and learn how to manufacture better than Toyota Motors (TM), Sony (SNE), Panasonic (PC) and a
host of lesser industrial luminaries that have proven their
capabilities
with decades of successful execution.

Over the last several months I've become convinced that a transition
from gasoline to compressed natural gas may be one of the great
opportunities of our age. Natural gas is abundant and clean, and an
easy domestic substitute for imported oil. While I don't know as much
as I'd like to about fiscal multipliers, I have to believe a massive
shift from imported oil to domestic natural gas would reduce energy
costs to consumers, slash CO2 emissions, generate
trillions in additional GDP and go a long way toward ameliorating the
looming deficit spending crisis many observers predict.

Just yesterday, the 2011 Honda Civic
GX, a conventional vehicle with a CNG fuel system, tied with the
all-electric Nissan Leaf for top honors in the American Council for an
Energy-Efficient Economy's list of the Greenest
Vehicles of 2011, a position it's held for eight years in a row. The
Toyota Prius came in fourth, well ahead of the GM Volt, which came in
seventh. I can only imagine what the ACEEE ratings would look like if
Honda added a hybrid drive to the Civic GX or Toyota added a CNG fuel system
to the Prius.

Mark Twain observed that
"history doesn't repeat itself but it does rhyme." When it comes to
specious and ill-conceived alternative energy technology initiatives
that originate
on the banks of the Potomac and rapidly mutate into bad investments, I
can't help but wonder whether we're just hearing another chorus from
the same old song – 99 Bottles of Energy on the Wall.

Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and holds a substantial long position in its common stock.

As the only truly vertically integrated geothermal developer, with
in-house exploration, drilling, turbine technology, and operations,
Ormat is still unique among geothermal companies. But not too
long ago their Organic Rankin Cycle turbines (which they call Ormat Energy Converters, OEC)
did not have much serious competition when it came to exploiting
relatively low temperature (liquid water) resources.

Organic Rankine Cycles

The Organic
Rankine Cycle (ORC) is also called Binary cycles because there are
two fluids involved: a working fluid as well as the geothermal fluid
which provides the heat. "Organic" refers to the fact that the
working fluid is usually an organic liquid such as isopentane or one of
several refrigerants. The working fluid is chosen so that it has
a much lower boiling point than water, and so it is in gaseous phase
and can drive a turbine when the heat source is too cool to boil
water. ORCs are also often used as bottoming units to generate
power from the waste heat from conventional turbines at
higher-temperature geothermal resources, or from the waste heat from
other types of industrial waste heat.

Ormat's over 300 million hours of turbine operations is still unmatched
by other companies' technology, but several rivals now have enough
history in the field and financial strength to provide product
guarantees so that geothermal developers and their banks can feel
confident that the projects will be reliable and durable enough to lend
money against.

The Competition

Mark Taylor, the lead
analyst for geothermal and CCS at Bloomberg New Energy Finance gave
an overview of the market for geothermal turbines at the GEA Finance
Forum in New York on February 9th. Binary turbines are still only
a small fraction of the market, with the majority of installed turbines
being larger conventional steam turbines, with leading suppliers being
Toshiba, Mitsubishi, and Fuji. Binary plants are only about 12%
of the market by installed capacity, and Ormat's OECs are installed in
92% of these. However, in terms of recent installations, Ormat
has only about half of the market for binary plants.

One sign of the increased competition was Ormat's deal with Nevada
Geothermal Power (NGLPF.OB, NGP.V) to develop the latter's Crump Geyser
property. Under the deal, Ormat will earn a 50% stake in the
property by doing all of the development work, and paying for most of
it, in addition to providing enough financing to Nevada Geothermal that
the latter will not need to pay anything more out of pocket to develop
the property. According to John McIlveen of Jacob Securities,
a significant factor in Ormat's willingness to do this deal was the
assurance that Ormat would be the contractor on the project.

While Ormat's competitors cannot offer drilling services as well as
construction and financing, many geothermal developers are comfortable
using their own drilling contractors. The two competitors to
present at the forum both appeared to me to have compelling offerings.

One turbine manufacturer that presented was Turbine Air Systems (TAS). TAS is
headquartered in Houston, with several offices in the Middle East and
South East Asia. Unlike the other manufacturers, TAS manufactures
their turbines in their factory, and move them on site in a minimum of
modules, which they claim saves time and on-site labor during
installation. Another way TAS saves time for developers is by
working only with nonflammable refrigerants, which can simplify the
permitting process. Perhaps more importantly, TAS has the
financial strength to provide vendor financing, as they did for US
Geothermal's (HTM) San Emidio property.

The other major turbine supplier to present was Pratt & Whitney, a
division of United
Technologies (UTX). Pratt
& Whitney purchased Turboden in 2009 adding full size binary
turbines to their small-scale mass produced PureCycle offering (I
discussed PureCycle in more depth in my 2007
overview of Geothermal power.) Turboden is a European
supplier of ORC turbine with 30 years experience and 174 plants
installed mostly in Germany, Austria, and Italy. Most of
their existing plants run off biomass and waste heat, but they have
made sales in geothermal, in Germany, Austria, and France.
Despite Turboden's limited experience in geothermal markets, Pratt
& Whitney's strong balance sheet and deep experience in power
generation markets mean the company has to be considered a serious
contender for geothermal power plants, and their competitive offerings
are likely to grow stronger as they develop a longer track record in
geothermal power generation.

Implications for Investors

For Ormat, the emergence of serious competition for ORC power plants
may reduce potential future growth in their product segment. This
may not slow the company's overall growth much, especially since the
product segment has recently been lagging anyway, mostly due to many
developers' difficulties in obtaining financing. While the
financing problem for geothermal developers is easing, some of the
rebounding market is likely to be captured by other turbine
suppliers. Ormat is likely to be increasingly reliant on its
electricity generation segment, which may put an upper limit on how
quickly the company can grow in future years. In my
recent profile of Ormat, I concluded that it was difficult to
justify the company's valuation even with the consensus five year
expected growth of 29% which was expected by analysts when I wrote that
article in October.

If anything, the newly competitive turbine market will reduce Ormat's
potential growth rate. Apparently other analysts agree, because
the current
consensus is now reported as 9.8%, a number I feel is much more
reasonable. However, at the current stock price of $29.32,
Ormat's forward P/E is 30.2, giving a Price/Earnings Growth ratio of a
stratospheric 3.63.

DISCLAIMER: The information and
trades provided here are for informational purposes only and are not a
solicitation to buy or sell any of these securities. Investing involves
substantial risk and you should evaluate your own risk levels before
you make any investment. Past results are not an indication of future
performance. Please take the time to read the full disclaimer here.

February 14, 2011

The Renewable IPO

By Greg Pfahl

Renewable IPOs in 2010

2010 proved to be a much better year for the initial public offering
and renewable energy companies, perhaps surprisingly, saw their share
of activity. In 2010 there were more than double the number of initial
public offerings than in 2009, and we also saw a significant increase
in secondary offerings as well.

Worldwide public investment in renewable energy increased 21 percent
last year, with China representing 20 percent of the 2010 market,
according to VB/Research of London. The REW 40 Index is up 15 percent
over the past year at this writing. While it’s hard to predict if 2011
will be a frothy IPO market for renewable companies, it is clear the
public’s appetite for risk in renewables is growing. Despite what you
may hear about the effect of lower natural gas prices on renewables, we
believe that it is public market performance and availability of
willing investors, not commodity prices, that drives the IPO market.

The renewable IPO field saw a series of fits and starts. There were
some fits: Solyndra, PetroAlgae
(PALG.OB), Trony Solar and Gevo (GEVO)
withdrew or reduced their IPOs. But there were some starts as well.
Even though Codexis
(CDXS) didn’t raise the $100 million it had hoped for last April,
it still pocketed $78 million from public investors with its IPO. And
Amyris is trading at the $30 level, nearly double the IPO of $17.20.

Codexis and Amyris
(AMRS) both succeeded on their IPOs because despite the fact they
are money-losing early stage companies, they have proven technology and
real revenues and contracts, with potential high-revenue products in
the pipeline. Codexis, which develops custom enzymes and catalysts for
industrial chemical production, has a project going with Shell, a major
investor, to speed up production of biofuels from nonfood sources.
Codexis had revenues of $101.5 million last year.

Amyris had revenues of $68.5 million for its synthetic
biofuels
technology. The company has been well-funded by venture
capital investors as it tries to show it can be "the leading provider
of renewable specialty chemicals and transportation fuels worldwide."
The company’s Biofene
yeast-based chemical takes Brazilian sugarcane and ferments it into a
petroleum replacement into several different applications, including
diesel and jet fuel. Amyris has benefited from consistently telling its
story in a convincing way to investors and the public.

California-based photovoltaic maker Solyndra withdrew its IPO in late
June citing “ongoing uncertainties in the public markets,” opting for a
$175 million private placement and a $535 million loan guarantee from
the federal government instead. The Solyndra withdrawal was described
by some observers as “muddying the waters” for other solar panel makers
to hit the markets, but considering the company had private and
government options, it was only prudent for management to pull the $300
million public offer until a better time.

PetroAlgae, on the other hand, is an example of what not to do. The
VentureBeat website cited PetroAgae as one of its worst clean tech
investments of 2010. The site said most analysts said the company
"jumped the gun" because it has burned through $58 million the past
three years and has no revenues. Worse, it has a complex corporate
structure and has already restated its financial statements. Companies
need their investors to understand their story in order to buy into it,
including the management, technology, corporate structure and business
and financial plan. Complex is bad; simple is good.

How to Plan an IPO

The decision to go public is complex, situational and a big step for
any company. Not all IPOs are huge. According to Keating
Capital/Capital IQ, 85 percent of NASDAQ companies have market caps
less than $1 billion and 40 percent of listed companies are
unprofitable. About 10 percent had revenues less than $10 million. If
your company determines that an IPO is the correct decision, companies
should know what to expect and how to prepare for an IPO, because it
isn’t all about the money.

Start early

This is not a fast process. If you are operating on a shoestring budget
and have three months worth of cash, the IPO is not for you because an
IPO will not get done in three months. Going public can take six months
but more likely will take a year. So if funds are dear, consider
government grants or loan guarantees, selling tax credits, selling to
private institutional investors, bank financing if you have
assets that can be used as collateral, licensing your technology or
other fundraising activities.

Still interested? Here are some issues that could trip you up on your
way to watching the closing hit the bank if not accomplished at least
six months prior:

Solid financials - You might
expect an auditor and CPA to say you need quality financial reporting,
but you’ll hear the same thing from underwriters, securities attorneys
and investors. The smarter clients considering either an IPO or even a
private sale get us involved several years before the deal. Renewable
companies are in their early stages. Investors understand that there
will be losses until a profit is made, but audited financials by a
reputable firm give you better leverage. Generally, when filing your
initial registration statement with the SEC, you will need to include
the most recent two years’ balances sheets and the most recent three
years’ income statements, statements of equity and cash flows, all
audited by an independent audit firm registered with the PCAOB. In
addition, if the age of the audited financial statements is more than
129 days old, then you will need to file stub period financial
statements which are required to be reviewed by your independent audit
firm.

Management – A year in
advance, evaluate your existing management team and assemble the best
team you can, preferably one with transactional or public company
experience.

Board of directors – You
should begin assembling a strong, independent board and a complete set
of corporate minutes and any governance records. Most private companies
operate with a board of directors consisting primarily of management
and friends or family members. However, most stock exchanges require
that the majority of the board of directors of a company traded on
their exchange be independent. In addition, the SEC requires an
independent audit committee.

Compensation Disclosure and Analysis
– Compensation disclosures have been one of the SEC’s hot buttons over
the past several years and as a public company you will need to provide
extensive disclosures in your periodic filings. So get the policies and
contracts in place prior to going public.

Document material agreements –
As part of their due diligence process, the underwriter and their team
will be requesting and reviewing all of your material agreements. In
addition, you will be required to file as exhibits with the initial
registration statement all material contracts outside of the ordinary
course of your business. This is where your legal counsel fits in.

Protect your intellectual property –
Investors
these days need to know what it is you truly own and can
defend in court if necessary from patent infringement.

Play defense – This includes
anti-takeover provisions and poison-pill takeover measures.

Do a risk assessment –
Identify any issues that could affect your company and prepare measures
to deal with them. This could vary from legal, market, commodity and
political risk to workplace issues.

Prepare for periodic filing
requirements – As a public company you will need to file
quarterly and annual reports with the SEC within the required
timeframes. Prior to going public, ensure that you have systems in
place to accommodate these requirements.

You will also need to disclose and report on your internal controls
over financial reporting. The requirement to provide an independent
auditor’s report on internal controls over financial reporting
(commonly referred to as 404b) was removed by the Dodd Frank Act for
smaller reporting companies as defined by the SEC, but even for smaller
reporting companies, management will have to provide their report on
the effectiveness of their internal control over financial reporting.
The initial documentation of internal controls and ongoing testing
required for this report can be quite time-intensive. Some companies
are handling this all internally and others are outsourcing but the
process can and should be started before going public and not afterward.

Selection of an Underwriter –
About six months prior to the IPO, management needs to select an
underwriter, who will ultimately market the transaction. Some important
considerations in making this selection are as follows:

Industry expertise

Size of firm, bigger is not always better

Their perceived commitment to your company both before and after
the offering

Their backlog of deals, are you going to be number one on the
list or number one hundred?

The underwriter will have its own SEC counsel who will work closely
with your own. At this point, the registration statement will begin to
be drafted. Once filed, the SEC will review the document and provide
comments, generally within thirty days. Within a week to two weeks you
will then respond to the SEC’s comments and file an amended
registration statement. The SEC will review the amendment typically
within about a week and potentially provide additional comments.
Because of these iterations of comments and responses, the SEC review
process can potentially slow down the transaction’s closing. It is not
uncommon during this process to establish direct contact with the SEC
to clarify their concerns and to help expedite the process, normally
handled by outside counsel and auditors with SEC experience.

The Road Show – One of the
last activities for management prior to closing is the road show, where
you make presentations to syndicate members, potential institutional
investors and retail brokerages. Management’s job in these
presentations is to respond to questions and present the company, not
hype the deal. While you can get into projections, you should stick to
facts as much as possible.

About the authorGreg Pfahl, CPA, is an audit partner
in the Denver office of Hein & Associates LLP, a full-service
public accounting and advisory firm with additional offices in Houston,
Dallas and Southern California. He also serves as a local leader for
the alternative energy practice area. Pfahl can be reached at
gpfahl@heincpa.com or 303.298.9600.

February 13, 2011

Distinguishing HEV Efficiency from Plug-in Vehicle Waste

John Petersen

Over the last couple years I've frequently argued that plug-in vehicles
are inherently wasteful on a micro-economic and a macro-economic level.
Unfortunately complex economic proofs are hard to grasp at a glance and
my biggest challenge has been finding a simple proof for a patently
obvious truth that can't be distorted by flimsy assumptions or
misconstrued with rosy forecasts. I hope today's article will drive a
stake through the undead heart of plug-in vehicle efficiency claims.

To keep it simple, I'll use the Camry Hybrid from Toyota Motors (TM),
the Leaf from Nissan Motors (NSANY.PK) and the
Roadster from Tesla
Motors (TSLA)
as examples.

The Camry Hybrid has an EPA fuel economy rating of 31 mpg city and 35
mpg highway while its conventional sister has an EPA fuel economy
rating of 22 mpg city and 33 mpg highway. The Leaf and the Roadster
both have EPA fuel economy ratings of 99 mpge. To achieve their fuel
economy ratings, the Camry uses a 1.3 kWh NiMH battery pack, the Leaf
uses a 24 kWh lithium-ion battery pack and the Roadster uses a 56 kWh
lithium-ion battery pack.

If we assume that all three vehicles will have a 10-year life and be
driven an average of 12,500 miles per year, the following table
summarizes the electric drive miles achieved per kWh of battery
capacity.

Camry

Leaf

Roadster

10-year mileage

125,000

125,000

125,000

Gasoline miles

88,710

0

0

Efficiency miles

36,290

Electric utility miles

125,000

125,000

Battery Pack kWh

1.3

24

56

Electric miles per kWh

27,916

5,208

2,232

Fuel saved per kWh

931

174

74

The first point that merits attention is that electric miles in a Camry
come from using gasoline more efficiently. In contrast, electric miles
in a Leaf or a Roadster come from an electric power plant that consumes
coal, natural gas or uranium to make the juice that dives the wheels.
Electric drive is more efficient than internal combustion if you start
your analysis at a full gas tank or battery, but most of that advantage
evaporates when you carry the analysis back through the
supply chain and factor in all emissions and inefficiencies starting
with the oil well or coal mine.

The second point that merits attention is that for every kWh of battery
capacity, the Camry is 5.4 times more efficient than a Leaf and 12.5
times more efficient than a
Roadster. Batteries are most valuable when they're worked hard and
cycled often. From the perspective of a battery, going to work in a
Camry is full-time employment on an assembly line, going to work in a Leaf is a part-time
job in a donut shop, and going to work in a Roadster is retirement on a
beach in Belize.

The reason is simple. HEVs are an efficiency technology that
uses a small battery to save 40% on fuel consumption.
Plug-in vehicles, in comparison, are fuel substitution schemes
that use batteries to substitute electric power for gasoline and replace the fuel tank at a capital cost of $3,750 to $7,500 per equivalent gallon of capacity.

Regardless of chemistry, advanced batteries are terrible things to waste
because they require prodigious inputs of scarce mineral resources and
are difficult, if not impossible, to recycle economically. They perform wonderfully when
they're used to improve fuel efficiency in an HEV, but they perform
poorly when they're used as fuel tank substitutes for a plug-in vehicle.

Future gas prices and battery costs will not change the fundamental
truth that batteries are five times more efficient
in HEVs than they are in plug-in vehicles. Batteries in HEVs
eliminate the use of
fuel while batteries in plug-ins can only add long tail pipes that
substitute a mix of coal, natural gas and nuclear power for gasoline.

In the final analysis, plug-in vehicles are a luxury no nation and no
investor can afford.

February 11, 2011

Outlook for Geothermal Energy Stocks in 2011

Tom Konrad CFA

My take-aways from the GEA Finance
Forum

After a long time lost in the proverbial desert of high capital costs
and few financiers willing to step up, a number of geothermal companies
made breakthroughs last fall. The Department of Energy (DOE) loan
guarantees for geothermal power development began to come through, and
financiers were beginning to step up.

Will the rest of 2011
offer more
positive news about successful financings of geothermal projects, or
will the news be more political risk and construction delays?

Overall, I left with my optimism for geothermal stocks restored.

The Good

HS Orka: I was one of
several members of the press to question Iceland's President Grimmson
about the rumors that the Icelandic government might force Ram Power to
sell HS Orka back to the government. He repeated the current
party line that the government has no
intention
of seizing Orka, but mostly ducked the question, saying
that Magma's President and CEO Asgeir Magnussun was the best person to
answer the question. But he did mention that Magma was engaged
with a group of Icelandic pension funds in negotiations to sell
a share of HS Orka.

Later in the conference, Magnussun said his company was working on
finalizing an agreement with the Icelandic government, in which they
will agree with the government to amend the long term lease of the
resource. This should allow the government to save face before
the populist protests. Magnussun also said that he suspects some
of the protesters are motivated not just by resource nationalism, but
also by a wish to stop industrial development. The driving force
for Iceland's current industrial development is cheap renewable
geothermal and hydro power, and if geothermal expansion can be delayed,
so can Icelandic industrialization.

Financing: It seemed
like every other person I spoke to at the conference was from some
financial company interested in funding the construction of geothermal
plants. It seemed clear that geothermal developers who have
proven resources should be able to get the money to build plants.

In particular, there were the following encouraging developments:

Islandbanki
and Hannon
Armstrong announced a joint venture (to be called GeoBanc) to
provide a full service, one-stop financial shop for geothermal
developers.

John McIlveen Research Director at Jacob Securities pointed out
the significance
of Enbridge's 2010 deal with US
Geothermal (HTM) to finance drilling and construction at Neal Hot
Springs. This deal was significant for two reasons. First,
the project was relatively early stage, with only two completed
production wells, so the investment was riskier than the typical
construction loan. Second, it was significant because Enbridge is
an oil and gas company. He thinks we'll see one or two more large
players from outside the industry entering into this sort of deal in
2011.

Jimmy Leung of Raymond James said he's currently working on a
$184 million geothermal financing he expects to close in the second
quarter of 2011.

In other words, there is likely to be a lot of money flowing into
geothermal projects in 2011, and that should be good for the stocks.

Risks for Geothermal

That said, neither drilling risk nor political risk is going away.

It's a truism that geothermal exploration is considerably more risky
than oil and gas exploration, simply because geothermal reservoirs are
much more complex than oil and gas reservoirs. Using a very broad
brush and oversimplifying somewhat, geothermal resources are hot fluids
moving through cracks in complex geologic formations with hydrothermal
features such as vulcanism, while oil and gas are typically in fairly
simple sedimentary formations where an impermeable layer caps a pool of
fossil resources in a relatively permeable layer below.

Given the complex geology, drilling risk will continue to be a long
term
feature of geothermal exploration, and it is the first risk that comes
to mind of many industry observers.

Nor is political risk going anywhere. Not only will there be
continuing problems with resource nationalism, such as we are seeing in
Iceland, but the United States is hardly a safe-haven, with Republican
congressmen falling over each other to introduce bills to grab back any
unspent ARRA money which could affect future DOE construction loan
guarantees and the ITC cash grants.

On the other hand, if subsidies for geothermal are cut as part of
budget cutting efforts, it will not be only geothermal, but many energy
sectors. Since geothermal is one of the most economically viable
renewable energy sectors, it may even emerge relatively well off.
Finally, as John Pierce of Wilson Sonsini Goodrich & Rosati pointed
out, the Republican-controlled House will be largely irrelevant to
whatever legislation actually gets passed: it will be the Senate where
the real decisions (if any) are made.

Conclusion

Drilling risk and political risk are nothing new for geothermal
developers. What is new is the emergence of a new class of
financiers who are willing to step up and fund geothermal
projects. We saw the beginnings of this trend in 2010, and it
looks like the trend will only accelerate in 2011. This can't
help but be good for the publicly traded geothermal developers who
can't fund their projects internally (the only ones that can are Ormat
and Calpine
Corp.
(CPN).

DISCLAIMER: The information and
trades provided here are for informational purposes only and are not a
solicitation to buy or sell any of these securities. Investing involves
substantial risk and you should evaluate your own risk levels before
you make any investment. Past results are not an indication of future
performance. Please take the time to read the full disclaimer here.

Anyone starting to smell a rat, using
our hopes and dreams to steal our money and reputation? I am.

Dana
Blankenhorn first
covered the energy industries in 1978 with the
Houston Business Journal. He returned last month after a short 29 year
hiatus because it's the best business story of our time. In between he
covered PCs, the Internet, e-commerce, open source, the Internet of
Things and Moore's Law. It's the application of the last to harvesting
the energy all around us he's most excited about. He lives in Atlanta.

Entech has also developed a concentrating solar module marketed under
the brand name SolarVolt that
converts the energy from sunlight into
electricity. The SolarVolt
relies on a unique optical design that
concentrates the sun’s rays toward an array of photovoltaic
cells. Because the solar input is concentrated the module
requires 95% less silicon than conventional photovoltaic cells.
Accordingly, the SolarVolt’s
cost/performance case is compelling
- at least from a raw materials standpoint.

Unfortunately, Entech has yet to gain much traction in the
marketplace. Sales totaled $173,000 in the first nine months of
2010. Consequently, the Company reported a net loss of $14.4
million in the period, largely on selling, general and administrative
expenses. Operations are using approximately $2.56 million in
cash per quarter. The Company had $1.7 million on the balance
sheet at the end of September 2010, not enough to sustain operations
through the end of the year.

It should not be a surprise that earlier this week CEO and Chairman of
the Board David Gelbaum invested another $1.0 million in the
company. Gelbaum was given another 15.0 million shares for his
generosity, bringing his ownership in the Entech to 46.9%.

Gelbaum founded the company with Mark O’Neill, who is the current chief
technical officer, and Robert Walters, who is VP of Marketing.
Gelbaum’s background is in quantitative modeling of derivatives, so we
will give him a pass on the weak performance in market
penetration. However, both O’Neill and Walters boast extensive
experience in engineering and technical sales.

The Entech Tubular Skylight was introduced in January 2010, and
contributed only nominally to 2010 sales. Management still
apparently holds out hope for improved sales volumes in the final
quarter of the year.

Concentrating solar technology is a seductive resolution to the high
cost of solar photovoltaic power generation. Earlier this year
the Company elected to focus on the electricity-only model, leaving the
thermal application to a time when market conditions are more
receptive. The SolarVolt
was submitted for independent
certification testing in September 2010, and the company has targeted
mid-2011 for introducing a fully certified product to the marketplace.

ENSL may be a penny stock plaything for day traders today.
However, we suggest investors put Entech on their watch lists for news
on the Company’s efforts to get certification of the SolarVolt
concentrating solar module. Certification may be that tipping
point that triggers customer interest.

Debra Fiakas is the Managing Director
of Crystal
Equity Research, an alternative research resource on small
capitalization companies in selected industries.

Neither the author of the Small Cap
Strategist web log, Crystal Equity Research nor its affiliates have a
beneficial interest in the companies mentioned herein. ENSL is
included in Crystal Equity Research’s Earth,
Wind and Fire Index in the
Solar Concentrating group.

February 06, 2011

Electric Vehicles and the Natural Resource Cliff

John Petersen

We all love to whine and complain about oil prices because we buy
gasoline regularly and that makes the price changes obvious. To solve
this overwhelming problem,
myopic visionaries with rose colored glasses propose a simple
solution – convert personal transportation from vehicles
powered by oil to vehicles powered by clean, free and renewable
electricity from the
wind and sun. Like most fairy tales, it can't happen in real life which means it
won't. This is not a technology issue. It's a raw materials
issue
and electric vehicles cannot solve the problem.

In the first three quarters of 2010, the world produced an average of
86 million barrels of crude oil per day. That works out to 0.65 metric
tons, or 200 gallons per year, for each of the planet's 6.6 billion inhabitants.
There's no doubt about it, oil is a scarce resource – at least until you compare
it with metals that are two to five orders of magnitude scarcer.
To put oil
in its proper perspective, the following table summarizes global
production data for several critical natural resources.

Natural

Global
Production

Per
Capita

Resource

(Metric
Tons)

Production

Crude Oil

4,282,736,000

648.9 kg

Iron & Steel

2,400,000,000

363.6 kg

Aluminum

41,400,000

6.3 kg

Copper

16,200,000

2.4 kg

Lead

4,100,000

0.7 kg

Nickel

1,550,000

0.2 kg

Rare Earths

130,000

20 g

Lithium

25,300

4 g

For every thousand pounds of global oil production, we produce ten
pounds
of aluminum, four pounds of copper, one pound of lead, six ounces of
nickel, a half-ounce of rare earth metals and a tenth of an ounce of
lithium. No thoughtful investor can compare per capita production of
oil and
essential metals and rationally conclude that we can increase metal consumption in the
name of conserving oil. The resource sophistry can't work in anything
beyond technical puppet shows for lazy, impressionable or childish minds.

To make matters worse, metal prices are anything but stable. We ignore
changes in metal prices because they're usually buried in the cost of
other products. That doesn't mean that metals are a bargain compared to
oil or that their prices are any more stable. The
following graph tracks market prices for oil and three of our most
important metals over the last 20 years. The trend lines are remarkably similar.

If we even try to significantly increase metal consumption in an effort
to conserve oil, the inevitable supply and demand imbalances will
quickly eliminate any advantage and simply make the situation worse. In
the final analysis, any energy policy or business model that increases
metal consumption in an effort to conserve oil must fail. We've already
seen the disastrous results of using food to make ethanol for fuel. There
will be blood if we follow the same foolish path with metals.

I am a relentless and unrepentant critic of plug-in vehicle hype and propaganda
because any plan to use hundreds of pounds of metal to replace a fuel
tank must fail. There aren't enough metals in the world to make a dent
in global oil consumption and using scarce metal resources to make
non-recyclable components like batteries and motors for plug-in
vehicles can only make the problem worse. It's sabotage
masquerading as a solution.

The only transportation technologies that stand a chance of survival in
a resource-constrained world are those that use tiny amounts of metals
to conserve large amounts of oil. Electric two-wheeled vehicles work as
long as the empty vehicle weight is less than twice the passenger
weight. For automobiles, resource effective technologies range from
simple stop-start idle elimination at the low end to Prius class
HEVs at the high end, although even these technologies can be marginal if the
primary components are not easily recycled. The instant you add a plug
the resource balance goes to hell in a handbag along with the
investment potential.

All the political will, good intentions and happy-talk forecasts in the
world cannot change the ugly facts. We’re driving toward a natural
resource cliff at 120 mph and fiddling with the dials on the navigation
system.

With the exception of Advanced Battery Technologies (ABAT) and Kandi Technologies (KNDI),
which have the common sense to focus on entry-level two- and
four-wheeled electric vehicles with minimal natural resource inputs,
the entire electric vehicle sector is a bug in search of a windshield.
It doesn't matter how cool the products are if there will never be enough
affordable raw materials to make them in meaningful volume.

Several companies that I follow have no chance of survival when their
business models are analyzed from a resource
sustainability perspective. The list includes Tesla Motors (TSLA),
Ener1 (HEV),
A123
Systems (AONE),
Valence
Technologies (VLNC)
and
Altair Nanotechnologies (ALTI).
In
each case their products have extreme natural resource requirements
and little or no end-of-life recycling value. They will compound our
problems, not solve them.

Several other companies that I follow have good resource sustainability
profiles because their products can make major contributions to oil
conservation without putting undue strain on global metal production.
My list of sustainable companies includes Johnson Controls (JCI).
Enersys
(ENS),
Exide
Technologies (XIDE),
Beacon Power (BCON),
ZBB
Energy (ZBB) and Maxwell Technologies (MXWL).
In
each case their products have moderate resource requirements and
high end-of-life recycling value.

There is only one energy storage company that can offer better performance
and lower resource requirements in the same product – Axion Power International (AXPW.OB).
Its serially patented PbC battery technology uses 30% less lead
than a conventional lead-acid battery, boosts cycle life and dynamic
charge acceptance by an order of magnitude, and retains the recycling
advantages of lead-acid batteries, the most recycled product in the
world. The unique performance characteristics of the PbC technology are proven and the
principal remaining risk is further refining fabrication equipment and
processes for Axion's carbon electrode assemblies. When Axion's
equipment, processes and products complete the final stages of
validation testing by its principal potential customers, the technology can
be easily ramped to a global footprint within a few years for a
fraction of the cost of other emerging energy storage technologies.

Axion has never been a stock market darling because its
management speaks in the past tense and focuses on challenges
overcome, milestones passed and goals accomplished. As a result of its
low key approach to the financial markets, Axion
carries a $54 million market capitalization despite the fact
that its disclosed industry and customer relationships include
East Penn Manufacturing and Exide Technologies, the second
and
third largest lead-acid battery manufacturers in North America,
Norfolk Southern (NSC),
the
fourth
largest railroad in North America and BMW, one of the most
highly regarded automakers in the world. Any time a
tiny company with a transition stage technology can quietly build
relationships with several world-class companies, astute investors
should pay attention.

Seven years ago I believed Axion had an honest shot at the big leagues.
Today I think I may have set my sights too low.
The progress I expect won't happen overnight, but it will happen long
before
we see a million plug-in vehicles on the road in the United States.

Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and
has a substantial long position in its common stock.

February 05, 2011

Throwing Corn off the Green Bus

I am a big booster of alternative energy. Harvesting the wind, the Sun,
the heat of the Earth, the tides – I'm there and NIMBYs be damned.

But I am increasingly having second thoughts about one type of green
energy. Corn-based ethanol. (I would toss in sugar cane, too, but
America doesn't grow enough to matter here.)

Corn ethanol was one of the first biofuels to find a market. Pushed by
companies like Archer Daniels
Midland (ADM) and Cargill, corn ethanol is now an integral
ingredient in many blends of gasoline. It is compatible with gasoline
and, its advocates say, it burns cleaner.

But corn is a row crop. That means it's planted in long rows. It's
dependent on man for its survival. (If we didn't open the husks and
spread the seed it would not exist.) Corn also takes nitrogen from the
soil. It depletes the land. The way you sustain land for corn is by
either spreading fertilizer every year or letting the land “rest” every
so often, rotating it with soybeans
or (better yet) some non-food crop such as a perennial grass.

Corn is also a food crop. The same process which leads to ethanol leads
to corn syrup. Corn is an essential feed for livestock of all kinds.
Corn ethanol competes with people and animals for corn.

All this makes corn an easy whipping boy for those who actually oppose
renewable energy, like oil industry analyst Bob
van
der Walk.

“Using food for bio-fuels – especially in Western countries – is
counter productive to keeping the price for those staples affordable,
but that is exactly what is being encouraged by the proposed federal
subsidies,” he writes.

He's right. Support for corn is the Achilles Heel of the alternative
fuels industry. And it doesn't have to be that way.

As venture capitalist Vinod Khosla notes, concentrated hydrocholoric
acid can break any plant material
into its constituent parts, leaving it all available for use.
Forest waste can be used to produce ethanol. So can switchgrass.
Polyculture, growing several different kinds of plants in the same
place, can become an economic source of cellulosic alcohol while
reclaiming land row crops are making unusable.

The problem here is that cellulosic alcohol is not yet a proven
technology. But that's a technical problem. It should not be a
political one.

The political problem here is not with the farmer – not if he has
economic alternatives to corn that can supply energy. The political
problem here is with the processors, with firms like ADM that have
married corn to green politics and don't want to change either business
or political strategy. The processors are the financial support for
politicians across the farm belt who are willing to stick their neck
out for renewable energy. Remove that support and, it seems, their
replacements would vote against us. Or they would.

It reminds me of the old “National Lampoon” cover from the 1970s – if
you don't buy this magazine we'll kill this dog. The dog in this case
is environmental politics, and ADM holds the gun.

It's time for that company to disarm.

Under CEO Patricia
Woertz, there have been some indications the company wants to do
just that. A former Chevron executive, Woertz talks a good game, but
the company's stock has gone
nowhere
under her leadership and its prospects remain tied to the
price of corn.

ADM has used government money for a demonstration cellulosic plant near
its headquarters, and has worked with Purdue on research that would
use all of a corn plant for energy production. But in this new game
it's only one of many contenders. In corn it's king.

Is the best way to accelerate the move to truly renewable ethanol, to
cellulosic alcohol, for the rest of the renewables industry to let ADM
go?

Dana
Blankenhorn first
covered the energy industries in 1978 with the
Houston Business Journal. He returned last month after a short 29 year
hiatus because it's the best business story of our time. In between he
covered PCs, the Internet, e-commerce, open source, the Internet of
Things and Moore's Law. It's the application of the last to harvesting
the energy all around us he's most excited about. He lives in Atlanta.

February 03, 2011

Battery Recycling Realities for Energy Storage Investors

John Petersen

One of the most fervently debated and poorly understood topics in
energy storage is the subject of battery recycling. What percentage of
the raw materials that go into a battery can be economically
recovered from used batteries with existing recycling technology and
infrastructure? While the details are quite complex, this article will
offer a high-level overview of the economics of battery recycling for
energy storage investors.

Lead-acid
batteries are the most recycled products in the world. The
process is both straightforward and cost-effective. When batteries
arrive at the recycling plant, they're put through a shredder and then
sent to a water bath. The shredded plastic floats to the top where it's
cleaned and reprocessed like any other recycled plastic. The shredded
metals sink to the bottom where they're transferred to a blast furnace
for further processing. The output from the blast furnace is mostly
molten lead with small amounts of copper and other metals that are
skimmed from the surface for disposal or further processing. The lead
is then poured into ingots and returned to manufacturers for use in
making new batteries.

Because of the inherent efficiency of the recycling process, over 97%
of all lead-acid batteries in the US and Europe are recycled and almost
80% of the lead used in the US comes from recycling rather than mining.
Many major lead-acid battery manufacturers, including Johnson Controls (JCI),
Enersys (ENS)
and Exide Technologies (XIDE),
operate company-owned recycling facilities for the dual purpose of
protecting the environment and stabilizing their raw materials supply
chains.

Nickel
Metal Hydride [NiMH] batteries present a more complex recycling
challenge than lead acid batteries. First the electrolyte is evaporated
using a thermal process and the batteries are then shredded and put
into a blast furnace. The output from the blast furnace is a simple
alloy of nickel (~60%) and steel (~40%) that requires moderate
post-recycling processing before the metals can be reused to make stainless steel. All rare
earth metals in NiMH batteries end up in a slag that's either sent to a
landfill or used for construction material.

Lithium-ion
batteries are a couple steps beyond NiMH in terms of recycling
complexity and cost. The closed loop Umicore recycling process that
will be used to recycle batteries for Tesla Motors (TSLA)
includes the following steps.

Step 5: production of Lithium metal oxide for new batteries (in
South Korea)

The electrolytes, plastics and carbons used in lithium-ion batteries
are burned off and destroyed in the recycling process. The output from
the blast furnace is a complex alloy of cobalt (~37%), steel (~37%),
Copper (~22%) and Nickel (~4%) that requires extensive post-recycling
processing before the metals can be reused. The lithium and aluminum
end up as slag that is either sent to a landfill or used as
construction material.

Using material
recovery estimates published by Umicore and average annual metal
prices from the US Geological Survey, I've
calculated that about half of the raw materials that go into a
lithium-ion
battery are recoverable through recycling while the other half the
materials are
lost forever.

In a press release last week Tesla announced a new battery-pack
recycling program with Umicore. A related
blog
from Tesla's Director of Energy Storage Systems spoke in
glowing terms of how the recycling would provide "a high margin of
return." The claims may defensible in Tesla's case since (a) they use lithium cobalt oxide batteries and roughly 75% of the economic value recovered through the use of Umicore's process is attributable
to the recovered cobalt, and (b) even $1 in recycling revenue would be a "high rate of return" when compared with the alternative of paying a landfill tipping charge. It's certain, however, that Tesla's potential recycling revenue won't be more than a low single digit percentage of the cost of a new battery pack. For
chemistries like lithium-iron-phosphate from A123 Systems (AONE),
lithium-magnesium-phosphate
from Valence Technologies (VLNC),
lithium-iron-sulfate
and lithium-magnesium-oxide from Ener1 (HEV) and
lithium-titanate from Altair Nanotechnologies (ALTI)
that
use cheaper electrode materials, recycling is likely to be a major
cost burden instead of an insignificant revenue source.

February 02, 2011

Power Integrations: Profiting from Efficient Electronics

Tom Konrad, CFA

With new climate legislation or a renewable portfolio standard unlikely
now that Republicans control the US House of Representatives, progress
on clean energy is likely to come mostly from action at the state
level, and from regulation at agencies such as the EPA, rather than
national legislation.

Why Energy Efficiency Standards Make
Economic Sense

One type of regulation that is fairly uncontroversial is improving
energy efficiency standards, that is regulation of the amount of energy
an appliance or other device can consume during normal use. In an
efficient market, regulation might bring non-financial benefits, but
those benefits would come at a the cost of making the market less
efficient. However, if a market is not efficient, then regulation
not only has the potential to bring non-financial benefits, it can also
bring financial gains by making the market more efficient. This
is the case with efficiency standards: they not only save energy, they
come with a net economic benefit.

For example, when you acquired your last mobile phone, it's extremely
unlikely that the energy use of the wall charger even crossed your mind
as a factor in you decision of which phone to buy. Even if you
had considered it, you probably would not have been able to determine
what any given charger's usage profile was, and the amount of time and
effort you put into determining your charger's energy use would have
been prohibitive. Your time would probably have been much more
valuable than the energy you might save by buying a phone with an
efficient charger.

For all these reasons, the free market does not provide an incentive to
makers of phone chargers to expend any effort or money making sure
their chargers are efficient. Even if one cent of added cost to a
phone charger would save the owner $1 a year in electricity, the
rational manufacturer would choose not to spend that extra cent,
because it would bring no benefit in terms of additional sales.

This is where regulation can bring a net benefit. While $1/year might
not be a lot of money for an individual cell phone user, the number of
cell phones sold each year is enormous, and the collective savings for
society are substantial. Business-minded conservatives can
support energy efficiency standards because of the economic benefit,
while environmentally minded liberals can support the energy savings
and associated reduction in CO2 and other pollution.

These facts have not been lost on regulators and legislators.
Congress passed the first National appliance standards in 1987, with
several pieces of additional legislation passed by both Democratic and
Republican controlled legislatures since then. Currently more
than 50 products are covered by a variety of highly cost effective
federal standards, most of which were based on existing state
standards. Economic studies by non-partisan economic researchers
have established the cost effectiveness of these standards to be at
least 2.7 to 1 [source, pdf].

For every dollar spent complying with an efficiency standard, there has
been a net benefit of at least $2.70. From an economics
standpoint, there is a strong case for tightening existing standards
until the marginal benefit only slightly exceeds the cost of more
rigorous standards, and also for expanding efficiency standards to
other energy consuming devices.

A significant beneficiary of any trend towards increasingly efficient
electronics will be Power
Integrations, which I decided to take another look at after it
showed up in my search for dividend-paying
energy efficiency stocks. The company is a leading supplier
of high-voltage integrated-circuit (IC) based power conversion devices,
with about 80% of the market for the most highly integrated power
supplies.

Historically, most power conversion was done with linear
transformers. Linear transformers, which convert power with coils
of copper wire, are not only bulkier than IC transformers, they are
considerably less efficient. Typically, half of the power is lost
in conversion, and sometimes as much as 80%. With IC
transformers, as little as 20% may be lost, at only about 30% in
additional cost. As copper prices rise and volumes increase, the
cost advantage of linear transformers should decrease. (Most of
this information is from an article at The Economist.)

It's not just cell phones that require DC current to operate: nearly
all electronics require some DC conversion. Computers, DVD
players, LCD televisions, microwaves, the list is practically
endless. That means there is plenty of scope to expand the market
for efficient IC transformers as prices fall and regulators apply
efficiency standards to more devices. LED lighting also requires
compact, efficient, power conversion, and Power Integrations highly
integrated transformers are particularly well placed for this
fast-growing market where space is often at a premium.
(Incidentally, the growth of the market for LEDs is driven not only by
lighting efficiency standards, but also by the rapidly falling cost of
LEDs.)

Valuation

The problem with all this growth potential is that the market already
knows about it. Over the last 5 years, revenues have grown at a
23% compound annual rate. Going forward, the consensus prediction
is 15% compound annual growth. The most dangerous time to own a
growth stock is when growth begins to slow, because not only do
earnings repeatedly fail to meet expectations, but investors begin to
re-evaluate lofty P/E ratios as their expectations of future growth
fall.

Although Power Integrations has a commendably strong balance sheet,
with no debt and a stratospheric current ratio of 6, it trades at a 22
trailing and 20 forward P/E ratio, and 3.5 times revenues (at the
$37.32 close on Feb 1). That's not bad at the historical 23%
growth rate, but does not look so good if you're only expecting 15%
growth going forward.

Overall, I like the business, but this seems like a company to watch
and buy after a negative earnings surprise or two (the last two
quarters beat estimates by 15% and 8%.) The long term
fundamentals of the business are sound, so it makes sense to wait until
other investors are depressed about the short term.

The company is expected
to release quarterly earnings tomorrow. If they miss the
consensus estimate of $0.41 earnings and $70.2M revenue, I'd wait a
couple weeks for the news to sink in, since the market tends to react
more slowly to bad news than good. If they beat estimates, which
is more likely given the strong economy last quarter, I plan to just
sit back and wait another three months.

DISCLAIMER: The information and
trades provided here and in the comments are for informational purposes
only and are not a solicitation to buy or sell any of these securities.
Investing involves substantial risk and you should evaluate your own
risk levels before you make any investment. Past results are not an
indication of future performance. Please take the time to read the full disclaimer
here.

And is that an exhaustive list? Far from it. Venture capitalists are
funding more all the time, often on the promise of greater efficiency.
While analysts at Greentech Media are very positive about companies
like AQT Solar
that can get into production fast and cheap, or SoloPower, with its claims of UL Labs approval,
it's clear to me that this is the first mile of a corporate marathon.

Put it this way. How many PC makers from the late 1970s can you
name? (Other than Apple.) In terms of this market, I don't even think
we're at 1977 yet.

There are just so many directions in which improvement can happen
with thin films. Efficiency, production cost, durability, materials
cost, etc. It's true that the total power being supplied by CIGS right
now looks pathetic next to standard panels, but the advantages are just
too obvious.

That's why companies like Dow Chemical and (now) Intel
are putting cash into the space. Dow likes the idea of solar systems
that go on with the roof, that in fact are the roof. Intel likes Sulfurcell, a German company that claims (as
others do) that thin films can be as efficient as panels.

The way to look at this is not through the eyes of current
production, or short-term profits. It's about the technologies behind
the curtain, the new materials and techniques that can get that to
market. A good venture capitalist will invest in 10 plays knowing only
three will ever bring him any return, but in hopes that 1 of those
three will be huge. That's the right attitude to have.

What does it mean when every roof, every wall, every tent
and bleach blanket can be delivering solar power to its owner?
Remember, electronics and many electrical devices are requiring
less-and-less power every year.

More to the point, what does it mean to an industry that depends on
long-term contracts for construction of panel systems if the wall can
deliver just as much power for the cost of wallpapering? Or painting?
That's a silly question today, but one that the people in this business
should probably start thinking about.

Dana
Blankenhorn first
covered the energy industries in 1978 with the
Houston Business Journal. He returned last month after a short 29 year
hiatus because it's the best business story of our time. In between he
covered PCs, the Internet, e-commerce, open source, the Internet of
Things and Moore's Law. It's the application of the last to harvesting
the energy all around us he's most excited about. He lives in Atlanta.